U.S. Responding to Cyber-Espionage: White House Acknowledges Increasing Threat

Client Alert

No longer cut from the cloth of 007’s expensive suits, fast cars or well-mixed drinks, present-day espionage is carried out, to a great extent, through computer screens, proxy servers and spoofed e-mail addresses. Dubbed cyber-espionage, this new wave of espionage includes unauthorized probing of a computer’s configuration, unauthorized evaluation of a computer system’s defenses or unauthorized viewing and copying of data files.1 Cyber-espionage is regarded by the highest levels of government as the biggest threat facing American business today, resulting from an unprecedented transfer of wealth due to the theft of valuable trade secrets, intellectual property and confidential business strategies.

A new White House strategy sets forth guidelines to protect U.S trade secrets from theft through cybersecurity breaches, the majority of which are thought to be led by the People’s Republic of China and conducted by advanced threat actors referred to as an “advanced persistent threat” (APT).

On February 20, 2013, the White House announced their strategy to protect U.S. trade secrets from theft by “corporate and state-sponsored ... misappropriation.”2 This strategy, which warns of the accelerating pace of economic espionage, and casts the theft of U.S. trade secrets in terms of national security, articulates five “strategy action items” designed to flesh out the role of government agencies in protecting the nation’s intellectual property. These action items, summarized below, include diplomatic action, the promotion of industry best practices, enhancement of domestic law enforcement, improving domestic legislation, and increasing public awareness. The White House strategy was presented in a joint press conference that included U.S. Attorney General Eric Holder; U.S. Department of Commerce Deputy Secretary Rebecca Blank; Commander of the U.S. Cyber Command, General Keith Alexander; and U.S. Intellectual Property Enforcement Coordinator Victoria Espinel.

The strategy, which emphasizes the widespread costs of intellectual property theft, comes on the heels of an Executive Order issued by President Obama calling for the protection of critical infrastructure.3 In addition, on February 19, 2013, the computer security firm Mandiant released a much-publicized and controversial report, which provided detailed evidence of a highly organized and sophisticated hacking unit within China’s People’s Liberation Army (PLA), from which a large number of cyber attacks on U.S. corporations, networks, and government agencies have originated.4 The strategy itself lists 20 incidents of cyber espionage and thefts of intellectual property that have taken place since January 2009. Drawing attention to the seriousness of the problem, Attorney General Holder said that “[t]here are only two categories of companies affected by trade-secret theft: those that know they’ve been compromised and those that don’t know it yet.”

White House Strategy Action Items

1. Focus Diplomatic Efforts to Protect Trade Secrets Overseas

The Obama administration’s first action item in their strategy is to work with the nation’s trading partners to ensure that the theft of trade secrets remains a serious issue, and to apply diplomatic pressure to discourage these thefts before they occur. A multi-agency approach will be used to make clear to foreign governments “the importance the U.S. places on the protection of trade secrets and to press those governments to take action to reduce and resolve incidents of trade secret theft.” In addition to diplomatic pressure, the strategy will use various trade policy tools to enforce against trade secret theft, and will seek the cooperation of international law enforcement agencies in this effort.

This point of the strategy “encourages companies to consider and share with each other practices that can mitigate the risk of trade secret theft” in order to come up with a set of best practices to protect trade secrets. The administration recognizes, however, that not all approaches will work for every industry or company, and points out that these best practices are not intended to represent a minimum standard of protection.

3. Enhance Domestic Law Enforcement Operations

The White House strategy makes clear that the “investigation and prosecution of corporate and state sponsored trade secret theft [is] a top priority.” The Federal Bureau of Investigation and the Department of Homeland Security will cooperate on these matters as necessary. The strategy also directs the Office of the Director of National Intelligence (ODNI) to coordinate discussions between the intelligence community and the private sector to focus on four main aspects of trade secret theft:

the number and identity of foreign governments involved in trade secret misappropriation

the industrial sectors and types of information and technology targeted by such espionage

the methods used to conduce such espionage, and

the dissemination, use, and associated impact of information lost in trade secret misappropriation.

The ODNI will also share threat warning and awareness information with the private sector where appropriate. Enforcement efforts will be further aided through cooperation of the Defense Security Service and Defense Intelligence Agency.

4. Improve Domestic Legislation

The strategy points out that President Obama signed two significant pieces of legislation into law: the Clarification Act and the Enhancement Act. The Clarification Act was enacted in response to the Second Circuit decision in United States v. Aleynikov,5 which overturned the conviction of a Goldman Sachs programmer who stole software source code before leaving for another company that developed competing software. The Second Circuit concluded that the code had not been placed in interstate or foreign commerce, and therefore there was no violation of the Economic Espionage Act (EEA). The Clarification Act amends the EEA to apply to any trade secret “that is related to a product or service used in or intended for use in interstate or foreign commerce.”

The Enhancement Act increases the criminal penalties available under the EEA for economic espionage. The maximum prison term is increased from 15 to 20 years. The maximum fines for individuals have been increased from $500,000 to $5 million, and the maximum fines for corporations have been increased from $10 million to either $10 million or the treble value that the company derived from the violation, whichever is greater.

5. Public Awareness and Stakeholder Outreach

The strategy recognizes the importance of encouraging all stakeholders to increase their awareness of the problem of trade secret espionage, and creates a number of actions to continue education and outreach in this area.

The Mandiant 'APT1' Report

In a strategy deemed to counteract a dip in gross domestic product growth and a fear of falling into a business gap that could hurt China’s economy both now and in the future, the Chinese government has reportedly been making a concerted effort to engage in extensive theft of economic secrets that can be put into use in China to compete against the U.S. economy. Consequently, experts in the field regard China as posing one of the most serious threats in the commission of espionage for gaining trade secrets. The Office of the National Counterintelligence Agency called Chinese actors “the world’s most active and persistent perpetrators of economic espionage,” in its report to Congress. 6

While not overtly stating as much, the White House strategy clearly intends to put pressure on the Chinese government to stop its trade secret espionage activities. The role of China in multiple high-profile incidents of cyber espionage is made clear in the strategy, which catalogs attacks on multiple companies, including Google, Lockheed Martin, and RSA Security, all linked to China. In an unrelated report, the computer security company Mandiant released detailed forensic evidence of widespread cyber espionage activities originating from a Chinese army unit known as “PLA Unit 61398,” which is estimated to be staffed by hundreds, and perhaps even thousands of professionals with proficiency in English. This report, the findings of which have been confirmed by U.S. intelligence officials, provides strong evidence that the majority of cyber attacks on U.S. corporations and government agencies have originated with this unit. Mandiant has indicated that these attacks, reportedly carried out using an infrastructure of over 1,000 servers, are both widespread and sophisticated, lasting anywhere from several months to several years, and involve such critical infrastructure as the electrical power grid, gas lines, and water lines.

The White House strategy observes the obvious diplomatic sensitivity of these allegations, and does not directly address efforts by the PLA. Further complicating matters, the United States has taken part in its own cyber-espionage, most notably the disruption of Iran’s uranium enrichment program through the Stuxnet malware. While it is clear that the Obama administration is taking any threat to U.S. critical infrastructure and trade secrets very seriously, its approaches to this problem will likely involve as much diplomacy as technology.

Conclusion

It remains to be seen both how effective the White House strategy will prove to be in stemming the tide of intellectual property theft, as well as what effect it may have on U.S. companies and the general public. Open questions for businesses to consider include:

By creating a strong link between trade secrets and national security, will this strategy make open information sharing between government and private industry more difficult due to classification of certain data?

How will this approach affect potential mergers and acquisitions? Will due diligence require notice of all past (and ongoing) attacks, and will this information be made available through a central government source? How will insurers react to proposed voluntary best practices?

FGIS is a global risk management firm which provides non-legal services in the areas of business integrity and compliance, safety and security, and investigations and due diligence. FGIS is a wholly-owned subsidiary of Pepper Hamilton LLP.

The material in this publication was created as of the date set forth above and is based on laws, court decisions, administrative rulings and congressional materials that existed at that time, and should not be construed as legal advice or legal opinions on specific facts. The information in this publication is not intended to create, and the transmission and receipt of it does not constitute, a lawyer-client relationship.

Authors

Walter B. Donaldson II
Managing Director
Freeh Group International Solutions, LLC
Freeh Group International Solutions, LLC is a global risk management firm which provides non-legal services in the areas of business integrity and compliance, safety and security, and investigations and due diligence.